Revaluation reserve

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CA Ruchir Jayantbhai Desai (Querist)
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27 July 2012 One of my client, a Pvt. ltd. has revalued its assets and created revaluation reserve. Now it has sold its one asset earlier revalued. For clarity, let us assume, the book value originally was 100. revalued amount is 150. So revaluation reserve is 50. It was sold foe 180. it has recognized profit of Rs. 30 in p&l and the revaluation reserve was transferred to general reserve.
Is the treatment proper as applicable AS, Guidance Note and Companies Act, 1956?

Amol S Joglekar

Amol S Joglekar (Expert)
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27 July 2012 Reversal of Revauation reserve is not disclosing the information ought to be disclosed. Profit on sale of asset is 80 and not 30. You need to credit profit on sale of asset as 80, corresponding debits would be asset account and reserve account.

CA Ruchir Jayantbhai Desai

CA Ruchir Jayantbhai Desai (Querist)
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27 July 2012 sir, can u please guide me using the referwnce of AS?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2025 Certainly. Let's walk through the situation using the Accounting Standards (AS) applicable in India, specifically AS 10 (Accounting for Fixed Assets) (prior to its revision) and Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets.

🧾 Case Summary:
Original cost of asset = ₹100

Revalued amount = ₹150

Revaluation reserve created = ₹50

Asset sold = ₹180

P&L shows profit = ₹30

Revaluation reserve transferred to general reserve = ₹50

📘 Applicable Accounting Standard and Guidance:
AS 10 (Accounting for Fixed Assets) — applicable prior to the revised AS 10 in 2016.

Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets (ICAI).

Companies Act, 1956, especially Section 211 and Schedule VI (now replaced by Companies Act, 2013, but applicable as per your timeline).

✅ Correct Accounting Treatment (As per AS & ICAI Guidance Note):
Let’s break it down in steps:

1. Recognition of Profit on Sale
According to AS and the ICAI’s Guidance Note:

The profit on sale of a revalued asset should be based on the original cost and not the revalued book value.

So, Profit = Sale Value – Historical Cost
= ₹180 – ₹100 = ₹80

✅ Therefore, the correct profit on sale = ₹80, not ₹30.

2. Use of Revaluation Reserve
The Revaluation Reserve of ₹50 is not routed through P&L. It is allowed to be:

Transferred directly to General Reserve (as your client did), or

Transferred gradually as the related asset is depreciated or disposed.

✅ So, transferring ₹50 from Revaluation Reserve to General Reserve upon sale is correct and allowed.

3. Disclosure in Financial Statements
As per ICAI Guidance:

The amount transferred from Revaluation Reserve should be disclosed separately in the notes to accounts.

This ensures transparency, so the stakeholders are aware that part of the gain is due to earlier revaluation.

❌ What’s Incorrect in the Original Treatment?
The P&L only showing ₹30 (₹180 sale – ₹150 revalued value) is not in compliance with AS.

It understates the profit by ₹50 and omits disclosure of the full gain.

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